If you already maintain multiple .minecraft directories you can "import" them into MultiMC very easily from a menu item.
If you only have one you can create new instances directly from the tool. Make sure to specify which Minecraft version the instance is supposed to use - Don's page will tell you - because it will automatically download the version it thinks you're supposed to have unless the version matches. In the case where a modded JAR is used that is bad news indeed.
MultiMC creates entire directory structures with all files including config and mods etc so each instance is entirely self-contained. That is in contrast to, say, Magic Launcher, which only manages specific directories it knows about. You can update mods and settings directly within the instance directory (at the same level as MultiMC.exe) if you want or you can use the tool to configure mods.
MultiMC is definitely the right answer. I'm sure either Don or myself will be able to post a step-by-step on configuring instances at some point.